For many years I have spoken with landlords about how “cash-for-keys” should be a tool in their belt for evicting problem or non-paying tenants; however, in light of the current COVID-19 eviction moratorium, the advantages of cash-for-keys are stronger than ever.
The term “Cash-for-Keys” is something that is most often used in the mortgage industry and refers to paying a borrower cash to voluntarily leave a home saving the bank (or foreclosure purchaser) the time and expense of having the borrower removed through the court system. The concept as it applies to an eviction is very similar. Instead of proceeding with an eviction action, the landlord offers cash (or something else of value) to the tenant in exchange for the tenant voluntarily leaving the home.
Why Would I Pay a Tenant to Leave Who is Not Paying Rent – They Already Received Free Housing?
As a landlord and real estate investor, we have to make business decisions and what makes sense in business does not always line up with what is “right.” I do not think anyone would argue that a tenant on the brink of eviction deserves money from the landlord. They do not. The landlord has already lost rent and will likely incur expenses related to cleaning, repairing, and re-renting the property. Even despite these expenses, it can make sense for a landlord to pay a tenant to leave the property.
Think of it this way. In normal times, an eviction in the state of Kansas will take 3-5 weeks to remove a tenant from the property. In Missouri, it can be even longer. Moreover, the landlord will spend $500 to $1,000 to remove the tenant from the property and those cost are seldom recovered. In fact, in Kansas the law completely prevents the landlord from even attempting to recover attorney fees from an eviction from the tenant. Therefore, the landlord is looking at lost rental income for a month or longer, plus attorney fees and court costs.
If the landlord offers the tenant a few hundred dollars to leave the property, he or she will often end up economically ahead as the property can be re-rented sooner and the costs may be less than the costs of filing and completing an eviction.
How Does COVID-19 Make Cash-for-Keys More Desirable?
On September 3, 2020, the Center for Disease Control (CDC) issued an agency order barring all evictions of tenants who complete an affidavit published by the CDC stating they have no available alternative housing. This ban is significantly more widespread than the previous Department of Housing and Urban Development (HUD) ban that applied only homes purchased using federally backed mortgages and the new CDC ban lasts through the end of 2020. This means that from now until January of 2021, a tenant can live in a home or apartment, not pay rent, and cannot be evicted.
It is true that the CDC Order specifically states that the tenant is still responsible for rent and that it will be owed after the moratorium. With that being said, as someone who has been a landlord, I can state confidentially that many tenants will not live up to this obligation. After receiving months of free rent, many tenants will just move out when the moratorium ends, leaving the landlord with limited options for ever recovering the lost income.
This is where cash-for-keys comes into play. Instead of allowing a tenant to live in the property for many months, a landlord can encourage the tenant to leave voluntarily by offering a financial incentive for voluntarily moving out. The landlord can then replace the tenant with a paying tenant, saving the landlord thousands of dollars in lost income. Moreover, because the tenant has left voluntarily, the moratorium does not apply so there is no risk of being fined under the CDC order.
How Much Should I Offer? Is Cash the Only Option?
In normal times, I would recommend that the amount paid in a cash-for-keys situation should be less than what the landlord would pay for an eviction; however, these are not normal times. The amount a landlord pays is a personal financial decision, but the landlord should consider the lost rent between now and January (and possibly longer if the moratorium is extended or the landlord has to evict the tenant). If the property rents for $1,200 and there are four months of non-payment of rent, that is $4,800 in lost rental income. As such, it may make sense to pay $1,000 to get the tenant out of the property.
It should be noted, however, that despite the use of the term “cash”-for keys, the payment does not need to be cash and could be anything that incentivizes the tenant to leave the property. One common example is paying for moving expenses. Instead of providing cash to the tenant, the landlord hires a moving company to assist with relocating the tenant. Tenants generally like this idea as the physical act of moving is often one of the biggest drawbacks to leaving a home or apartment. Knowing that someone will take care of it for you makes moving sound much more palatable. On the other hand, this is a great resolution to the landlord because the money is being used to do exactly what the landlord wants done – getting the tenant out of the property.
Another thing to consider offering is a positive reference for the tenant. Besides the physical work of moving, another thing that limits tenants is their ability to find alternate housing. Because the new landlord will almost always ask for a rental reference, the fact that the tenant has a negative payment history will limit their ability to find new housing. Therefore, a positive or neutral rental reference can help in this regard.
It should be noted, however, that there are some concerns about providing an untruthful positive reference. As a landlord, you would not want another landlord to do this to you with your tenants. Therefore, I would recommend sticking to the positive – and truthful – things you can say about the tenant. For example, if the tenant cared for the property but did not pay rent. Focus on the fact the tenant cared for the property when speaking with the future landlord. Furthermore, if you forgive the past due rent as part of the agreement for the tenant to leave, you can state that the tenant is paid up at that point. You also can just be silent and not be a negative reference as opposed to be positive. The bottom line here is that you have to decide what is right for you but agreeing to not stand in the way of the tenant’s new lease can be a powerful bargaining chip when it comes to getting a tenant to leave voluntarily.
How Should I Structure My Cash-for-Keys?
Your creativity is the only limit on how cash-for-keys can be structured. With that being said, I would recommend that you seek to have as much of the cash (or other items of value) delivered to the tenant after the tenant leaves the property as possible. The reason for this is that if the tenant fails to honor your agreement (whether oral or in writing), your only recourse is to file an eviction action. As such, you are back to square one except you are out the money you paid to the tenant. Therefore, you want to make sure that the deal you structure ensures that the tenant does in fact leave the property.
Now, it is not always possible to put all the cash at the end. For example, maybe the tenant needs the money for the deposit at the new place, and they obviously are not going to move out without somewhere to go. Therefore, you may have to provide cash up front. With that being said, I would still make sure there is some incentive for the tenant once he or she has left, even if that means paying a little more than you could have.
Another way to handle this situation is to pay for the services needed by the tenant directly to the third party involved. For example, instead of giving the tenant a couple hundred dollars to rent a U-Haul, rent the truck yourself (and get insurance). This ensures that the money is used for the rental truck and not a new TV or something else that is not going toward moving from the property. Moreover, because you ensure the money is used for what it is intended to be used for, there is limited value to the tenant if they choose not to leave the property. In other words, they can not just take your money and still refuse to move out.
Should I Require the Property be in Good Condition to Get the Money?
I would make this part of the agreement, but it is up to you on if you want to enforce it. Again, the tenant is not entitled to any money – you are paying them because it makes business sense to you. If the tenant damages or trashes the property, it is further evidence they do not deserve the money, but it still may be advantageous to you to make sure they are fully gone. If fighting over the payment is going to cause the tenant to not fully leave, claim they still occupy the property, or consider challenging you in court, in many instances it make sense just to pay them. The exception to this being when the tenant has intentionally damaged the property prior to leaving. Other than that, I would say that in most instances it is best to just the tenant out and you could always pursue a later damages claim against the tenant.
Do I Need an Attorney? Does the Agreement Need to be in Writing?
This is one of the very few times where an attorney is going to tell you that something does not need to be in writing. The reason is that if the tenant breaks the agreement, you must go to court to evict the tenant. Since you already had a basis for evicting the tenant, it doesn’t put you in any better position than you were before (except maybe for a claim for what you already paid the tenant). Therefore, I would recommend that it is better to structure the deal so there is incentive for the tenant to leave as opposed to worrying about getting a formal contract written.
With this being said, the above comments are referring to when you are using cash-for-keys as an alternative to eviction. This article has not touched on the topic, but you can also use cash-for-keys to remove a tenant when you just want to take back the property but they are otherwise not breaking any lease terms (e.g., if you need the property for a family member). In this instances, you will likely have to pay quite a bit more and I would recommend getting the agreement in writing so you can evict the tenant if he or she goes back on the agreement.